Undisclosed orders and optimal submission strategies in a limit order market

Sabrina Buti and Barbara Rindi ()

Journal of Financial Economics, 2013, vol. 109, issue 3, 797-812

Abstract: Reserve orders enable traders to hide a portion of their orders and now appear in most electronic limit order markets. This paper outlines a theory to determine an optimal submission strategy in a limit order book, in which traders choose among limit, market, and reserve orders and simultaneously set price, quantity, and exposure. We show that reserve orders help traders compete for the provision of liquidity and reduce the friction generated by exposure costs. Therefore, total gains from trade increase. Large traders always benefit from reserve orders, whereas small traders benefit only when the tick size is large.

Keywords: Reserve orders; Limit order book; Liquidity; Welfare (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:3:p:797-812

DOI: 10.1016/j.jfineco.2013.04.002

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